Healthcare Services Group, Inc. — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. This is an annual filing, not a standalone fourth-quarter report. Unless noted, amounts are in U.S. dollars.
Business context
The company provides housekeeping, laundry, linen, facility maintenance, and dietary services to healthcare facilities. At year-end, it served approximately 2,500 facilities in 47 states. Housekeeping represented about 77% of 2010 revenue and Dietary about 23%. Client contracts are generally renewable annually and can be canceled on 30 to 90 days’ notice after an initial period.
Financial performance
| Metric | FY 2010 | FY 2009 | Change |
|---|---|---|---|
| Revenue | $773.956 million | $692.695 million | +11.7% |
| Net income | $34.441 million | $30.342 million | +13.5% |
| Diluted EPS | $0.51 | $0.46 | +10.9% |
| Net income margin | 4.5% | 4.4% | Up slightly |
| Income before taxes | $54.119 million | $49.335 million | +9.7% |
| Cash from operations | $37.747 million | $38.307 million | Down $0.560 million |
| Capital expenditures | $4.174 million | $2.154 million | Higher |
- Costs of services were 85.9% of revenue, versus 86.3% in 2009. SG&A was 7.4% of revenue, versus 7.3%; pretax margin was 7.0%, versus 7.1%.
- Housekeeping segment revenue grew 11.9%; Dietary grew 11.4%. Excluding CES acquisition revenue, reported growth was 11.0% for Housekeeping and 6.2% for Dietary.
- Fourth-quarter revenue was $202.087 million, compared with $182.561 million in 2009. Fourth-quarter net income was $9.123 million, compared with $6.566 million.
- Year-end cash and cash equivalents were $39.692 million; marketable securities were $43.437 million. Combined, these totaled $83.129 million, compared with $83.949 million a year earlier. Working capital was $181.244 million and the current ratio was 5.5:1, down from 6.1:1.
- Total assets were $277.934 million and stockholders’ equity was $213.079 million. The company reported no line-of-credit borrowings. Its $36 million credit facility was subject to a $35.420 million standby letter of credit at year-end; the facility increased to $42 million on January 1, 2011.
- Accounts and notes receivable, net, were $108.426 million. The allowance for doubtful accounts was $4.069 million; 2010 bad-debt provision was $2.2 million. The company reported $9.269 million of client promissory notes receivable, net of reserves.
Material changes and notable items
- Revenue and net income increased, while pretax margin edged lower. SG&A excluding deferred-compensation fund effects rose 15.5%, faster than revenue, largely due to payroll and related expenses incurred ahead of new business.
- Housekeeping labor and other labor costs improved to 81.1% of segment revenue from 81.3%; Dietary labor costs worsened to 53.5% from 52.5%. Dietary supplies improved to 39.4% from 40.0%.
- Investment and interest income fell to $2.622 million from $4.624 million, reflecting lower interest returns and lower realized and unrealized investment gains. The 2010 figure included $1.083 million of unrealized losses on certain marketable securities.
- Operating cash flow was nearly flat year over year. Revenue growth increased working-capital needs, including receivables and inventory. Investing activities provided $3.080 million, primarily reflecting net marketable-security sales; financing activities used $32.436 million, including $39.285 million of dividends paid.
- The company paid a 3-for-2 stock split as a stock dividend in November 2010. CES, acquired in May 2009, was fully integrated into company operations effective January 1, 2010, making year-over-year comparisons partly acquisition-influenced.
Outlook, risks, and contingencies
- Management said 2011 financial performance could be comparable to 2010 as a percentage of revenue, while cautioning that there is no assurance. It expected segment revenue mix to remain broadly similar; Dietary growth was expected primarily from existing Housekeeping clients and Housekeeping growth primarily from new clients.
- Management expected 2011 capital expenditures of $2 million to $3 million and an effective tax rate between 36.4% and 38.5%. It expected to continue regular quarterly dividends, subject to Board review. A $0.15625 per-share dividend was declared for payment in March 2011.
- Key risks include client dependence on Medicare and Medicaid funding, state budget deficits and reimbursement reductions or delays, collection risk, and labor and supply cost inflation that may not be passed through promptly. A single nursing-home-chain client accounted for 11% of 2010 revenue, although it represented less than 1% of year-end accounts receivable.
- Additional risks include short-notice contract cancellations, workers’ compensation and general-liability claims estimates, taxability disputes across jurisdictions, investment-value and interest-rate fluctuations, and integration or retention challenges related to CES. Approximately 18% of hourly employees were unionized.
- The company reported no material pending legal proceedings beyond routine matters believed adequately covered by insurance or immaterial. It disclosed no material off-balance-sheet arrangements other than the standby letter of credit. Management and the auditor reported effective internal control over financial reporting; the financial-statement audit opinion was unqualified.
Investor verification priorities
- Confirm the sustainability of revenue growth and the organic-versus-CES contribution by segment.
- Monitor receivable aging, client payment terms, bad-debt provisions, and the effects of Medicaid reimbursement changes on customers’ liquidity.
- Assess whether labor and supply cost increases can be passed through without further margin pressure, particularly in Dietary.
- Review liquidity after dividends, growth-related working-capital needs, insurance letter-of-credit requirements, and the credit facility’s covenant terms.
- Track the major client’s revenue concentration, the adequacy of insurance claim reserves, and the performance and risk profile of the municipal-bond portfolio.